Motorola looking east for technology rescue?: Under pressure, Japanese vendors must expand or wither

The notion that an ambitious Chinese handset vendor will make a bid for Motorola Inc. has received some press in the United States, perhaps aided by a touch of nationalistic horror.
The Chinese government and Chinese banks already finance a big chunk of the American government’s debt. Wouldn’t it be a shame to see a Chinese rescue of a fundamentally American brand?
Xenophobia, economic uncertainty and a growing sense that certain American corporations have seen better days all produce a sort of fascination with the Motorola story – and trepidation over how it will turn out. Many now believe that the handset maker’s problems will require so much money and time to resolve that no partners will be forthcoming.
Japan to the rescue
But based on a market analysis of likely candidates, a potential rescue of Motorola would be far more likely coming from a Japanese vendor, according to Bonny Joy, analyst at Strategy Analytics.
Joy said he has no specific information that a Japanese handset vendor or its industrial conglomerate parent has or will make such a bid. Not only has no party publicly expressed interest, but Motorola has been publicly opaque about the true causes of its malaise.
In fact, the biggest factor behind the dearth of offers is out in the open, for all to see, the analyst said: Motorola’s handset portfolio is 12 to 18 months behind the curve.
“There’s lost time in Motorola’s portfolio and timing is key,” Joy said. “No one wants to catch a falling knife.”
But intense pressure in their domestic market is bearing down on Japanese handset vendors, pushing them to expand globally, face mergers-and-acquisitions or simply shut down. Japanese vendors’ strength in 3G handsets – a notable Motorola weakness – would make such a tie-up logical, Joy said.
Pressure at home
Recall the last two headlines involving Japanese handset vendors. Sanyo Electric Co. Ltd. is selling its mobile phone business to Kyocera Corp. for $375 million and Mitsubishi Electric Co. will shutter its handset division on dwindling market demand. Left standing: Sharp Corp., NEC Corp., Panasonic and others. Sharp, however, is said to be entering the Chinese market ahead of this year’s Olympics, chasing an expansion opportunity just exited by Kyocera under pressure from top-tier brands there. So, ambition still burns despite the sword overhead.
Joy cited several factors that have contributed to the current picture of the Japanese market and that – at least on paper – make a tie-up with Motorola attractive to a number of Japanese vendors, should they decide that the substantial risks are outweighed by potential benefits.
First, the Japanese market for upgraded handsets – which offer higher average selling prices, fatter margins and average revenue per user growth – is shrinking. Carriers such as NTT DoCoMo Inc. and KDDI Corp. are attempting to retain subscribers by offering handset upgrades with lower subsidies that can be billed to the subscriber in installments over the ensuing months of an extended contract. A sizeable number of Japanese subscribers are opting out of those offers, Joy said, effectively shrinking the addressable upgrade market.
Those carriers also are promoting the latest handsets by multinational brands such as Nokia – which wants a piece of the lucrative Japanese upgrade market – exacerbating the pressure on domestic vendors.
“There is an impact – a price impact – with lower subsidies from operators,” Joy said. “We don’t think vendors can drive their product development costs down lower without expanding to international markets.”
This changing landscape creates a possibly complementary tie-up between a major Japanese vendor and Motorola, Joy said. Japanese vendors virtually all have long experience with 3G handsets, something Motorola lacks. Motorola, in turn, has a far-flung, if faltering, global distribution network that could aid a Japanese vendor facing an expand-or-die ultimatum in its home market. Sharp and Motorola, for instance, would make “a natural fit,” Joy said.
China challenges
In contrast, both ZTE Corp. and Huawei Technologies Co., Ltd. – the Chinese vendors oft-cited in speculative reports on a possible Motorola partner – both specialize, at least in handsets, in entry-tier products and Motorola already covers that portfolio segment in emerging markets with its W series, the analyst pointed out.
Having sketched the most likely tie-up for Motorola based on the best complementary fit and least overlap, however, Joy readily acknowledged that the exercise is speculative.
“There’s a development gap in Motorola’s portfolio and any serious buyer who looks at the company has to fill this gap,” Joy said. “The biggest challenge to any buyer is to offer a solution to Motorola’s problem. From a product-based point of view, it looks like a fit with a Japanese vendor is the best fit. But no hard information is available.”